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Friday, October 07, 2016

Can You Imagine The Federal Reserve

Raising Rates In This World?

"The Fed in particular has painted itself into a very tight corner with its never-ending threats to raise interest rates while the rest of the world is still cutting. Millions of words have been written about its reasons for behaving this way and the difficulties of the road it has chosen. But for now it’s enough to note that Yellen et al are still at it, dropping hints that come October rates are really, seriously going up because the U.S. is a healthy, well-run country whose borrowers should borrow more and whose voters should reward incumbent politicians with four more years! .. But the rest of the world is not cooperating. Deutsche Bank, of course, has everyone spooked and speculating not about whether it needs saving but how and when this will happen .. Perhaps to get out in front of Deutsche Bank’s coming Big Announcement, capital outflows from Italian and Spanish banks have accelerated .. These banks and many more in Europe and elsewhere need massive infusions of liquidity, some of which will have to come from the U.S. since that’s where so much of the money is .. Put another way, to avoid wide-spread banking collapse, a coordinated global currency devaluation will be necessary. For the U.S. to tighten while everyone else is in full-on panic mode would make a chaotic situation even more unmanageable. Fed governors know this, hence their (no doubt) sleepless nights and public dithering."- John Rubino*LINK HERE to the commentary

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The Overlords of FinanceJohn Mauldin | October 7, 2016

We keep having to find inventive new ways to describe the ever more extreme antics of our central bankers. In today’s OTB, good friend Danielle DiMartino Booth draws an interesting historical parallel in a valiant attempt to place post-Great Recession central bank activity in a comprehensible context.

She takes us back to the 20th-century era of World Wars and draws upon the thinking of Liaquat Ahamed, whose seminal work The Lords of Finance is said to have been inspired by that unforgettable 1999 Time magazine cover story titled “The Committee to Save the World” – you know, the one that splashed the lovely mugs of Alan Greenspan, Robert Rubin, and Larry Summers up there, grinning like the Cheshire Cat (well, except for Larry, that is).

Ahamed’s treatise, says Danielle, is “a study [of] the perils of devaluing stores of value by force, the dangers of runaway debts, and the menace of monetary myopia.”

Franklin Roosevelt devalued the Depression-weighted US dollar by forcing up the price of gold. Germany’s inability to pay its World War I debts set off an explosive chain of defaults among US allies, compelling the US to effectively bail out Germany’s debt. And the stubborn orthodoxy of Depression-era central bankers led them into competitive interest rate rises that would let their countries to hold onto their dwindling gold supplies, even though the floundering global economy desperately needed lower interest rates.

But today, says Danielle,

If anything, the power of the kings and queens running the world’s central banks has become even more concentrated. In a reversal of economic fortunes, today’s economy is in desperate need of higher rather than lower interest rates, of a normalization of policy to put a floor under the bloodletting in pensions, insurance companies and among retirees worldwide.

And yet, the powers that be insist they know that better than the unwashed and uneducated masses that suffer at the hands of their misguided policies. Of course the benefits of negative interest rates outweigh the costs. And whose business is it anyway if central bankers impinge on the ability of capital to determine the value of a given entity?...

That brings us to the parallel between then and now, to the conflagrations smoldering under the surface of the world economy that have a similar source of kindling as the World War era. That is, debt, a huge overabundance of debt. The latest figures out there suggest that global debt now eclipses $200 trillion, or about three times the global economy.

And unlike in the late ’90s, when Indonesia, Thailand, and South Korea jacked up their debt loads and then Russia’s default forced Al, Bob, & Larry to ride to the rescue, today “the debt is simply everywhere, at least to the extent we can see and measure it. Corporate and sovereign debt, of both the developed world and emerging market varieties, are at record levels. China’s debts certainly add to that record but who really knows to what extent? It’s the ultimate black box of leverage on Planet Earth.”

Read on to see why Danielle doesn’t think “a perverted gentlemen’s agreement” among central bankers, politicians, and investors will stave off a quadrillion-dollar reckoning.

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